Watchdog Gives US Pay Czar's Legacy a Failing Grade

The government's restrictions on pay at bailed-out banks had little lasting impact because officials soft-pedaled some issues and did much of their work out of the public's view, a congressional panel says.

Obama administration pay czar Kenneth Feinberg used "black-box" processes that provide few lessons for the private sector, according to a report Thursday from the Congressional Oversight Panel that monitors the $700 billion financial bailout fund. The report faults Feinberg for deciding not to seek the return of $1.7 billion in banker pay that he deemed "ill-advised."

An office with far broader oversight than Feinberg's failed to produce a single public document that could help Wall Street and its regulators improve bankers' incentives to make future crises less likely, the report says.

"There's a transparency problem with all of this," said panel chairman Ted Kaufman, a former Democratic senator from Delaware. "I don't know if they should have done more, because we don't have a real good idea of what they were doing."

The report says Feinberg's office successfully reduced overall pay by 55 percent between 2008 and 2009 for top executives at the seven companies that got the biggest bailouts. Their cash compensation was cut even more sharply, by 90 percent, Treasury has said.

Reducing cash pay shifted a larger portion of the executives' compensation into company stock. Increasing stock-based compensation helps tie pay more closely to executives' performance. If the company's fortunes rise, the stock is worth more.

However, the panel said stock grants by Feinberg's office were spread over too short a time to hold bankers accountable for their decisions. Awarding the stock over many years discourages risky bets that might create short-term profits.

Treasury officials said the department did everything Congress demanded in the law on executive compensation.

"Our first rulings cut total pay in half and slashed cash compensation by 90 percent," said Acting Assistant Secretary for Financial Stability Tim Massad in a statement. "A key goal of Treasury's actions was to make sure taxpayers were repaid in a timely manner, which is happening faster than anyone expected."

The panel said Feinberg's actions sometimes lacked teeth, such as during a "look-back review" of early payments to bailed-out bankers. Feinberg had to decide if any of the payments ran counter to the public interest. If they did, the law authorized him to seek repayment on behalf of taxpayers.

Feinberg could not force the banks to repay the money, but he was adept at using the bully pulpit to pressure bankers publicly.

Feinberg deemed $1.7 billion in payments to be "questionable" and potentially inappropriate. But he stopped short of using the language "contrary to the public interest," which would have triggered a public negotiation.

"This is a distinction only a lawyer could love," Kaufman said.

Treasury officials say the point of the review was to recapture taxpayer money that was used to line executives' pockets. Most of the questionable payments were from banks that already had repaid their bailouts, so there was no reason to go after them, Treasury officials say.

The report points to major failures of transparency at an office that was separate from Feinberg's, known as the Office of Internal Review. The office was responsible for making sure all of the companies that received bailout funds followed basic disclosure rules and otherwise complied with guidelines intended to protect taxpayers. The office produced no public documents.

Treasury officials say it played a deterrent role by forcing top executives to swear that they were following the rules.

The companies originally overseen by Feinberg's office were: Citigroup Inc., based in New York; Bank of America Corp., based in Charlotte, N.C.; American International Group Inc., based in New York; Chrysler Group LLC; Chrysler Financial LLC; General Motors Co., based in Detroit; and Ally Financial Inc., formerly GMAC Inc., also based in Detroit.

Feinberg is a lawyer best known for determining payouts to the families of victims of the Sept. 11, 2001 terrorist attacks. He currently is the administrator of a fund set up to compensate victims of last summer's Gulf oil spill.

The oversight panel was created as part of the $700 billion financial bailout law. It will release its final report next month.